Developing the Chinese market is a top priority for many multinational companies. Across industry sectors, however, they face a common obstacle: attracting, developing and retaining the local Chinese talent needed to accomplish this goal. Lack of supply is not the only issue.

Global firms realize the importance of having local leadership in tune with the idiosyncrasies and rapid shifts of the Chinese market. In a recent interview with The Wall Street Journal, Pierre Cohade, the Asia-Pacific president of Goodyear, confirmed that the number one challenge in China “is absolutely the fight for talent.” Goodyear is hardly alone: Over the past 13 years, the American Chamber of Commerce has conducted annual surveys of U.S. companies in China and frequently cites management-level human resource constraints as the top business challenge.

Localization: why bother?
Global companies are driven to hire staff from within each target market primarily to gain access to knowledge of new regions. In China, for example, this has driven many multinationals to reduce the number of non-Chinese staff. Pankaj Ghemawat, a business school professor at IESE business school, has researched the impact of “cultural distance” on business and has found greater challenges where companies operate across regions that lack historical and cultural overlap, as is true with North American and European companies in China. Successful practices abroad may not transfer well: companies that lead in other markets, including Best Buy and The Home Depot, have floundered in China due to an insufficient understanding of Chinese consumer habits and local conditions.

Cultural distance has inspired significant changes in the business practices of multinationals in China, from marketing and product design to government relations. KFC, for example, developed a Peking duck-flavored sandwich, and Microsoft’s Bill Gates met with President Hu Jintao to discuss rampant software piracy. Beyond simple focus groups and market studies, companies require senior talent who can understand the local needs, run the business accordingly, and work in tandem with the headquarters and business units around the globe.

Although lower labor costs are commonly cited as a benefit of staff localization, this is often true only for entry- and mid-level roles. At Procter & Gamble, for example, one executive indicated that a local Chinese hire typically represents only one-third the cost of an expatriate. However, following the rise in average income and the appreciation in the Chinese currency, this gap has begun to close. With the competition for top local talent intensifying, the best Chinese managers may eventually become just as expensive as their foreign counterparts.

Qualified talent: the top 10%
Despite acknowledging the clear need to localize, multinationals struggle to achieve this due to a shortage of qualified labor. McKinsey, a management consultancy, recently referred to this as “the supply paradox” because it is difficult to find acceptable hires despite having so many college-educated applicants. In 2005, the company predicted a looming war for talent based on research, suggesting that “fewer than 10% of job candidates, on average, would be suitable for work in a foreign company [across selected major industries].” Recruiting is also difficult because some find that the best students do not always make the best employees. As John Holden, former president of the National Committee for United States-China Relations, has noted, “some MNCs prefer not to hire recent graduates from the elite Chinese universities, electing to go with candidates from second-tier and regional universities who have more real-life experience and, perhaps, ambition.”

The quality of management talent is on a path of significant improvement, which can be attributed to broader educational and employment opportunities. First, more Chinese are studying abroad: in 2010, the number of Chinese students abroad was roughly 200,000, including a 30% increase over 2009 for those in the U.S. Second, management education is both improving and becoming more aligned with established practices: The China Europe International Business School recently lured its new dean from Harvard Business School in an effort to reform its faculty, fundraising, branding and school culture. Similarly, Peking University’s Guanghua School increasingly uses course materials from London Business School and Harvard Business School. Finally, with the growing presence of multinationals in China, the pool of local managers familiar with multinational practices has expanded. As a result, both the quantity and quality of management talent in China are improving.

Yet demand for top talent continues to outpace supply for three main reasons. First, more foreign companies are deepening their commitment to, and presence in, the China market. Second, multinationals are seeking to increase the proportion of local staff in their organizations. According to Brian Newman, CFO of PepsiCo China, “we are now almost fully localized, with the exception of a few C-suite positions.” Third, taking advantage of the rapidly growing Chinese market often requires a breakneck pace of expansion, requiring more managers of increasingly higher caliber.

Chinese companies heating up the talent war
The competition for top talent is not simply a battle fought among multinationals. Both state-owned and private Chinese enterprises are snapping up a greater share of the top talent pool by means of compelling offerings, often at the expense of multinationals. The latter’s traditional advantages in attracting talent – prestigious brands, higher compensation and career-development opportunities – are eroding. According to a survey of Chinese job seekers conducted in 2010 by Manpower, a human-resource consultancy, the number of respondents identifying Chinese privately owned companies as their primary choice is up by 5%, with foreign companies down 10%, compared to four years earlier. Primary drivers for this change are better long-term career development opportunities and better compensation. A Procter & Gamble executive echoed this point, commenting that “compensation in China is very good, with a tripling of one’s salary three years out. That’s not including housing allowance, company car or interest-free loans you get as you get more senior. We’re not being cheap, but we simply can’t compete with the ridiculous stock options Chinese companies offer when they want a new marketing head.”

The abundance of aggressive local ventures in a booming market, coupled with substantial cash from retained earnings and venture capital, has translated into a fierce local poaching of top talent. With the right qualifications, a middle-level Chinese manager at a multinational would likely find higher pay and increased responsibility at a local company. For example, an assistant manager in a large corporation might become the general manager of a publicly listed company or the junior partner at a private equity fund, helping growth-stage companies run their operations. As Richard Sprague, a Beijing-based Microsoft executive, commented, “our employees know they can go to Baidu [a Chinese technology company] or other companies and get a big chair with a hundred people under them.” For proven managers, there is often a generous selection of alternatives driving higher turnover.

The attractiveness of outside opportunities is exacerbated by the frustrations that Chinese employees sometimes feel while working for a multinational. Given that they are often reporting to foreign managers of regional or global business units who are less familiar with the rapid changes and business practices in the Chinese market, local employees feel much of their time is spent “translating” for foreigners. For example, many multinationals have stringent internal controls to prevent the embezzlement and fraud that can be significant risks in an emerging market like China. Gifts for government officials and business partners – often labeled “kickbacks” – have strict guidelines in terms of value and appropriateness, even for important Chinese holidays, when such practices are common. As one expatriate executive observed, locals feel that these regulations, set by foreign leaders, are “cramping their style, making it impossible to do their jobs.” External opportunities can become more enticing if local hires feel limited by operations that are inefficient and/or insensitive to local needs.

An executive education program director at a leading Chinese business school framed this challenge another way: “The fundamental issue is trust; does the headquarters trust you? When the local employees don’t see that trust, they will leave. The problem with many multinationals is that systems to promote locals are still ad hoc. Without a formal support system in place, the process of identifying one or two top candidates a year, sending them abroad and hoping that they can build the necessary trust doesn’t work. The systems that do exist are still immature.” As a result, local employees may at times see a glass ceiling that restricts their promotion opportunities within a multinational. Along with the increasing competition for top local talent, these issues of trust, communication, work style and career trajectory are major challenges in trying to build a strong local management team.

Hurdles for multinationals: China’s ‘cultural distance’
Language is a commonly cited barrier for multinationals in China. With English still considered the international language of business, multinationals often find Chinese managers must improve their English language skills to be able to function effectively – and express themselves persuasively – in a non-native tongue. While many leaders excel with these soft skills in a first language, it is significantly more difficult to carry the same leadership presence in one’s second, third or fourth language, further detracting from the confidence of company heads in their multinational’s home country.

Cultural norms and work styles are equally important. Chinese managers tend to operate more comfortably in clearly hierarchical structures, as opposed to more open and flatter collaborative office environments. As one executive with Microsoft noted, “Chinese managers might have trouble managing upwards within multinationals when needing to challenge authority, express divergent opinions and take risks.”

Finally, multinationals in China point out difficulty with geographic mobility. Family ties and cultural obligations to care for one’s parents may cause staff to oppose relocation. P&G, for example, is able to recruit heavily from universities in Beijing and Shanghai, but struggles to staff positions in North China. Chinese, while seeking international exposure, are sometimes reluctant to leave China due to rapid changes in the market and fear of “missing out” on the growth. Rotating assignments across geographies, considered crucial in career development at some multinationals, often incurs high career and family opportunity costs for local talent.

Leadership development, global exposure and ‘cool projects’
In response to these challenges, leading multinationals have developed internal initiatives to address these hurdles and become even more attractive career-development places for top local talent. GM, Microsoft, P&G, PepsiCo and other multinationals use a variety of programs to lure and retain China’s best and brightest. These initiatives include, among other things, global rotations, internal training, monetary incentives and collaborative curriculum-building with local universities,

Microsoft, for example, uses two methods to give Chinese managers international exposure: The first brings top U.S. managers to China to work side-by-side with local employees and provide developmental coaching. The second – sometimes referred to as a “reverse expat” program – sends Chinese managers to the U.S. for several months to gain a deeper understanding of headquarters operations and to absorb valuable experience working in a foreign environment. Microsoft’s Sprague suggests that “retention is less of an issue, I think, partly because we have so many developmental programs like these.”

According to an executive at GM China, “critical thinking and creative problem-solving – two fundamental skills of a manager or staff member at all levels within a multinational – are a clear development area in the Chinese education system.” Indeed, many firms note their involvement with local universities, either through collaborative curriculum-building and/or sponsoring or participating in industry events, such as case competitions and panel discussions. Companies also consistently point to their advocacy for more rigorous general management training.

Beyond training and development, Chinese employees – like everyone else – are acutely concerned about compensation when making career decisions. As mentioned above, one of the challenges multinationals face when addressing this topic with Chinese employees, particularly executives and business-development professionals, concerns a major difference in how multinationals and local Chinese companies get deals done in China – kickbacks. Chinese professionals view kickbacks as perfectly normal and an integral part of the Chinese business culture, while multinationals, regardless of their view, must comply with the standards in place in their home country and, if public, the laws where they are listed (e.g., the Foreign Corrupt Practices Act in the U.S.).

Often times, Chinese managers at multinationals feel this puts them at a disadvantage when competing for deals with their counterparts at Chinese companies, creating tension and potentially a reason to leave. To combat this, the multinationals can choose a variety of tactics to focus on. They can be transparent about kickback policies upfront, they can try to give employees a career path with clear direction on promotion opportunities and they can keep the workload interesting. One executive at Microsoft commented that “our employees get to work on cool, cutting-edge technology projects with sophisticated software development processes. From our internal review process, we know this is [as important], if not more important, than their salary.”

Multinationals are clearly emphasizing the significance of localizing their organizations in China, but the talent management challenges are formidable. Top local talent is scarce but critical. Chinese companies, rather than multinationals, are becoming more attractive places to work. In addition, China’s “cultural distance” from the home countries of many multinationals operating in the country is great. Several multinationals have left China because they could not navigate these issues successfully. For the multinationals that remain, talent management – specifically recruiting, developing and retaining top local talent in China’s large, complex and rapidly growing economy – has been over the past decade, and will undoubtedly continue to be, a major focus for success.

This article was written by Phillip Dodyk, Alexander Richardson and Michael Wu, members of the Lauder Class of 2013. It was originally published on Jan. 3d, 2012 by Knowledge@Wharton under the title “Talent Management at Multinational Firms in China”. Copyright Knowledge@Wharton. All rights reserved. Translated and reprinted by permission.

Subscribe to ParisTech Review and receive our monthly newsletter

Subscribe to our push alertReceive an email when a new article has been published

Previous article you have missed on ParisTech Review

A few decades ago, when Africa was crumbling under the burden of debt, economic forecasts were very pessimistic. But the vigorous growth of African economies has proven them wrong. Where does the African growth come from? What are its specificities? What does Africa need to be able to race with other great emerging countries?